How Do I Choose the Right Lender for My Car Loan?
Looking for the best lenders for car loans shouldn't feel like you're just spinning the wheel and hoping "The Price is Right." Still, trying to understand how to compare car loan offers can leave you feeling like a contestant subject to the whims of the game.
It doesn't have to be that way, though! With the proper knowledge, you can find a lender like your local credit union focused on providing credit union car loan rates that serve your needs, not just the bottom line. Read on to learn how to compare car loan offers like a true winner.
Evaluate Your Financial Situation
Having your finances straight can be a strategic advantage before you even begin to look for the best lenders for car loans. Follow these steps to get started:
- Assess your credit score. Your credit score is one of the most significant factors impacting your car loan. If it is too low, the best lenders for car loans may not even consider you. It will also affect how much you can borrow and the interest you will pay. Check your free annual credit report, and if you're not happy with the numbers, consider taking action to raise your score before seeking a car loan.
- Determine your budget. Add up your monthly income, subtract your average expenses, and you'll know how much you might reasonably afford to spend on a monthly car loan payment. But remember, you'll also want to budget for related expenses like car insurance, gas, and maintenance.
- Consider your down payment. The lower the down payment, the higher your monthly payments will be. But, the more you pay upfront, the less you will pay in interest. Most experts recommend putting down at least 10% for a used car and 20% or more for a new car loan.
Research Potential Lenders
With your financial plan in place, you can feel confident looking into the best lenders for car loans. There are four main ways to get a car loan:
1. Credit union car loans
If you are not a credit union member, the value you’ll find in credit union car loan rates alone can make joining worthwhile. And, many credit unions allow you to join and apply for a loan simultaneously. Check your local credit union to learn more about its membership requirements (such as geography, profession, or other affiliation). As not-for-profit, community-based institutions, every credit union is directly accountable to its members. So, it’s no surprise credit unions are a market leader in car loans!
2. Traditional bank car loans
Traditional banks are for-profit generalists. While offering competitive rates to attract more borrowers is in their interest, they are also incentivized to prioritize profits. Look out for added fees or higher charges that may increase your overall costs. You will also want to consider a bank's customer service reputation.
3. Online lender car loans
Online lenders have gained traction by coupling convenience with competitive rates. There are also aggregator sites where borrowers can shop multiple lenders, including traditional financial institutions. However, the popularity of online lenders has attracted scammers as well. As with any activity online, be guarded with personal information and only use sites you know you can trust.
4. Dealer financing
Every major automaker has a financing division. And, many dealers also have arrangements with banks and credit unions. Still, keep in mind that dealers are notorious for including add-ons and upsells. They can also markup the lender interest rate to increase their profit, or they simply may not offer as good of a rate as other lenders.
Consider getting pre-approved
No matter which lender you choose, acquiring a loan pre-approval is one of your best tools for negotiating and budgeting. You can get as many pre-approvals as you like within a 14- to 45-day period without hurting your credit report. You can also compare pre-approvals and negotiate with other lenders using the best offer.
How to Compare Car Loan Offers
Finding the best lenders for car loans requires carefully comparing each loan offer's terms. Here are the key elements you'll want to consider when determining how to compare car loan offers:
Look at interest rates
It's common to conflate the terms interest rate and annual percentage rate (APR), but as you compare loan offers, be sure you understand the difference between them. The interest rate is the percentage of interest you'll pay on your loan amount. The APR is the interest rate plus any fees or additional annual charges.
Check for additional fees and charges
Each loan offer will have its own fee structure, and it may not be possible to make a straight comparison of the overall terms. Fees that may be open to negotiation include:
- The origination fee is often paid upfront as a percentage of the loan amount.
- Market adjustment fees are applied when a high-demand vehicle is in short supply.
- Pre-payment penalties kick in if you decide to pay off your loan early.
- Various types of additional insurance and vehicle protection coverage.
- An extended warranty goes into effect after the manufacturer's warranty ends.
Understand flexible loan terms
Flexible loan terms will include whether you are allowed to make additional payments against the loan balance — which reduces the interest you are charged over the life of the loan. You may also be able to extend the offered loan period and lower your monthly payments, though this will raise your total costs.
One flexible option to study carefully is the difference between fixed and variable interest rates. A fixed-rate provides predictability. However, a variable rate may come with a lower introductory interest rate, which can be helpful if you plan to pay down your loan quickly. The double-edged sword of a variable rate is that it can go either up or down and ultimately cost you more than a fixed rate over the long term.
Evaluate customer service
While not as tangible as a low APR, knowing you can get a real person on the phone to straighten something out is a big deal when you need it. When evaluating customer service, look for reviews and consumer reports discussing the lender. You can also check sources such as the Better Business Bureau for ratings.
At the same time, don't forget the importance of your instincts. Take note of how responsive each lender is when getting pre-approval, and consider whether you want to work with them for the next several years.
Read the Fine Print
As you search for the best lenders for car loans, remember that you are paying for a service. You have the right to understand exactly what you are buying before you sign. Take your time and check for hidden fees and clauses. This includes anything that may not seem immediately relevant, such as limits on refinancing or vehicle modifications.
Make sure you understand the entire loan agreement. If anything needs to be clarified, ask the lender for an explanation. There's no such thing as a dumb question when it involves your money. If you're not satisfied with the response, be prepared to step away to do more research before signing.
Further Resources on Choosing the Right Lender for Your Car Loan
You can never know too much about understanding how to compare car loan offers and finding the best options for you. Here are some additional resources on the topic:
- Be prepared for the upsell. Know what is negotiable before you sign for your next auto loan.
- Know what it means to cosign a loan. Cosigning comes with significant obligations your cosigner needs to understand first.
- Get the inside scoop. A former car salesman draws on his experience to offer tips on everything from negotiation tactics to budget considerations.
Get on the Road with a Credit Union Car Loan
Choosing the best lender for your car loan is an important decision that can significantly impact your financial situation. There's a reason credit unions have a reputation as trustworthy and reliable lenders — and why so many borrowers choose credit union car loans. Use our Credit Union Locator Tool to find a credit union near you. Trust us; it's a game-changer.